US Stocks Mixed; Banking, Energy Shares Higher

PeterA. McKay

U.S. stocks were mixed as the banking and energy sectors made solid gains but other sectors slipped.

Investors shook off a report that Bank of America will need $34 billion in additional capital, betting instead that the beaten-down financial sector has adequately factored in such risks. Participants also remain hopeful that the U.S. economy is due for a rebound, which could in turn boost demand for oil and other commodities.

Major stock indexes were mixed. The Dow Jones Industrial Average, which was up almost 95 points at its morning high, posted a 23-point gain around noon EDT. The Nasdaq Composite Index slipped 0.6%. The S&P 500 was up 0.8%, led by its financial sector, up 4%, and energy, up 3% amid a rally in oil prices.

Crude-oil futures neared $56 a barrel in New York after new inventory data showed a smaller rise than expected in U.S. stockpiles of the commodity.

Energy prices have also been helped lately by bets in anticipation of the post-Memorial Day driving season, though some traders are skeptical that the economy is presently in good enough shape to generate the usual summer demand.

"Both oil and stocks are being driven right now by sentiment, by the expectation that the economy is going to pick up in the future," said Tom Bentz, vice president of BNP Paribas Commodity Futures in New York. "Oil should be trading at $25 based purely on the fundamentals right now. But the reality is, that's not how the market works."

Bank of America was up about 8.4% despite a report in The Wall Street Journal that regulators have told the company that it needs to take steps to shore up its books based on the results of the government's stress tests. Regulators began notifying the 19 financial companies subjected to the tests of the results on Tuesday, with a public announcement due late Thursday.

Market veterans are still on guard against nasty surprises in the tests, though many say their concern has been tempered in recent days by a series of leaks that have given a general sense of what the results will look like following the official unveiling.

"At this point, I'm not worried that we'll see anything to take the market to new lows," said strategist Jim Paulsen, of Wells Capital Management in Minneapolis. "But I do think you could get some short-term imbalances if certain details come out differently than people expect."

The credit markets continued to show signs of easing. A key measure of bank-to-bank borrowing costs, the Libor rate on three-month loans of U.S. dollars, is under 1% after spiking to 4.8% last fall.

However, the U.S. financial system hasn't yet returned to such health that banks can play their usual role as engines of growth in the broader economy, said Don Wilson, chief executive of the proprietary futures-trading firm DRW Trading in Chicago.

"It's nice to see Libor come in the way that it has," he said. "That's a step in the right direction, but I'm not sure how much money is actually being lent at Libor."

In economic news on Wednesday, a report from Automatic Data Processing and Macroeconomic Advisors said the U.S. private sector shed 491,000 jobs during April, better than the 650,000-job decline that economists had expected the report to show and a slowing in the pace of job losses seen during the first three months of the year.

The report boosted traders' hopes that jobs data due from the government on Friday will also turn up better than expected. Economists, however, have stayed wary in their outlook for the broader economy.

"We remain profoundly skeptical of the idea that the economy is now on a smooth path to recovery," said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, N.Y. "Those parts which took the biggest pounding after Lehman are rebounding to some degree but the overarching problem of massive household leverage remains."

Elsewhere, General Motors shares were down 10% after the ailing auto giant said in a regulatory filing that the government could end up owning at least half of GM and current common stockholders will be left with roughly a 1% stake if a restructuring plan being currently considered is approved.

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